If a place doesn’t get its debt under control, interest payments eventually devour its useful spending. Greek salad, anyone?

Maybe the only good thing about the deep freeze that has descended upon eastern Canada — when was it, about seven months ago? — is that it has put a crimp on the National Week of Action Against Austerity. (This is Quebec, so of course ‘national’ actually means ‘provincial.’) The week’s planners had in mind 40 separate events that were supposed to disrupt life in downtown Montreal, for once their event is over they go marching off through downtown, parade permit or no parade permit. But it’s hard getting turnout when anyone who stands still for more than five minutes turns into a pillar of ice.

In the first run-through of mass action against fiscal sanity during the student protests in the spring of 2012 the endlessly inventive organizers had their troops parade topless or even nude, though with their crucial bits covered up by the red cloth squares that were the no-logo protest’s logo. That tactic, which guaranteed extensive news coverage shot from inventive angles, has been put on hold. In the first of the protests, outside Premier Philippe Couillard’s Montreal office, protestors’ faces were barely visible behind fur and wool and their lips seemed to have difficulty forming words, which was not a problem three years ago when the air verily oozed with sophistry.

The austerity the protestors are protesting refers to the new Quebec government’s attempt to rein in spending, boost tax revenues and balance its budget by 2015-6. To do so it is cutting the rate of growth of spending. Spending was $97 billion for the current fiscal year. It’s going to be $98.1 billion next and then $100.3 billion. Per Quebecer it’s currently $11,808, so if you’re a family of three: over $35,000, a family of four: getting on to $50,000 — per year, every year.

In nominal terms spending is not going down. In real terms, depending on the rate of inflation, which is minimal right now, it may go down a little. Granted, the number I’ve given is for ‘total consolidated expenditure,’ which includes interest on the debt. And interest is rising faster than program spending, though program spending is still going up. But you’d think rising interest payments —from $10.6 billion this year to $11.1 billion next — would be a warning in itself. If a place doesn’t get its debt under control, interest payments eventually devour its useful spending. Greek salad, anyone?

Related

Mind you, there are legitimate questions about just how useful Quebec’s current spending is. The government’s website lists 198 agences, bureaux, centres, comités, commissions, conseils, directeurs, fonds, instituts, ministères, offices, régimes, secrétariats, sociétés and tribunals. We didn’t always have 198 such organismes and we did reasonably well. You’d think we could give up or downsize or at least stabilize the growth of a few of them, maybe more than a few, without necessarily returning to the Dark Ages of the 1990s or 1980s.

The local evening newscasts are a good indication of how this place works. Typically, you get a couple of stories about this or that social group being up in arms about receiving less funding than it has become accustomed to. That’s true whether we’re in a week of National Action or not. You then get a story about a minister of the government launching this or that social initiative, these days ones that are more communications than content and that may not actually cost that much more than the press conference kicking them off. And you get a story, some nights more than one, about a water main having broken and some poor family’s basement having flooded. “Hundred-year-old infrastructure,” some official invariably shrugs. Do you think maybe resources are being — have been — misallocated? You think maybe maintenance of infrastructure — even privatizing of infrastructure — should get priority over social initiatives, however worthy? Infrastructure can actually be fixed. Social problems are stubbornly, notoriously resistant to government communications strategies.

Quebec is not yet Greece. It may not even be the worst Canadian province. But then again Greece didn’t used to be as bad as Greece is now, either. And the unwillingness among many protestors to recognize democratic judgments gives pause.

It’s true, as Andrew Coyne has written, that in cutting back the sumptuous subsidies to daycare the Couillard government has broken an election promise. It shouldn’t have done that. In fact, it shouldn’t have made the promise in the first place: In the current caterwauling over the distress of the middle class no one has fingered the upper-middle class for special sympathy, though they’re the main beneficiaries of this program.

Everyone obviously has the right to speech. But the view among many protestors seems to be only they have the right to decide. No matter how legitimate or recently-elected the government or its program is, ‘The Struggle’ requires relentless resistance. If disruption, including uncivil disobedience, can cow the legislature or frustrate the public and eventually turn it, exasperated, against the government, then that’s what has to be done.

The protestors want this spring, if spring ever arrives, to be a season of action, repeating their successes of 2012. We had an election last year. The polls suggest a strong majority is behind the new government’s goal of controlling spending and eliminating the deficit. My guess is they will fail. But if they should succeed, if Quebec proves governable, in the southern European way, only from the street, the rest of the country may need to think about arranging a Quebexit. As a lifelong Quebec federalist, I come to that conclusion sadly. But Confederation won’t function with a Greece at its centre.

Not just Bombardier gets government bailout money. Everybody in manufacturing receives government largess

Early indications are that this year’s federal election campaign may turn into a political potlatch for central Canadian manufacturing. This was true even before debt issue, a write-down, an executive shuffle and suspension of a product line sent Bombardier’s stock into a severe stall. Ottawa let Nortel go. It has seemed willing to let BlackBerry go. Given politics in Quebec, could it possibly let Bombardier go? Given politics outside Quebec, could it possibly not?

Quebec’s economy minister is apparently ready to act. “We have money available to finance Bombardier customers. If Bombardier needs that money for its liquidity, we can work with them on that,” Jacques Daoust was quoted as saying. That’s not quite a bailout, but such talk feeds the beast.

Deciding whether Bombardier needs or will get a bailout may be a bit premature – though discussing such things before the bailiffs are at the door would be a refreshing change from our usual practice. The rest of manufacturing seems set to benefit from federal largess almost no matter what.

On a recent visit to southwestern Ontario Justin Trudeau chided the Conservatives for all but abandoning the region’s manufacturing industry and for failing to be a good, which presumably means fiscally generous, partner in encouraging regional growth. The subtext is that if Stephen Harper and Kathleen Wynne don’t get along, and they obviously don’t, a whole region of the country can’t grow. Were that actually true it would be sad testimony to how government-dependent our economy has become.

Trudeau’s statement in an interview with the London Free Press that the region needs help to move beyond manufacturing into “more innovation and high-tech and a more knowledge [sic] economy, entrepreneurship and looking at other strengths here such as health sciences and research” prompted a Gotcha! counter-charge from Finance Minister Joe Oliver that it was Trudeau himself who was giving up on manufacturing by telling “hundreds of thousands of people working in the … sector that they should find another job.”

It’s going to be a long summer, isn’t it? Assuming we have summer this year.

Related

For his part, NDP leader Thomas Mulcair has announced his government would cut the income tax rate for small business from 11 to 9 per cent. What Afghanistan was to Barack Obama small business is to the NDP. Afghanistan let Obama show he wasn’t really a pacifist despite his opposition to the Iraq war. Supporting small business lets the NDP show it’s not anti all business, just big business. Who doesn’t love small business? Unfortunately, there was no mention in Mr Mulcair’s announcement of the increased tax-gaming that would result from widening the gap between big-business and small-business rates, on the one hand, and small-business and personal rates, on the other.

The NDP would also introduce an innovation tax credit “to encourage investments in machinery, equipment and property used in innovation-boosting research and development,” a measure Mr Mulcair announced proudly, as if tax help for innovation were, well, innovative. Finally — finally, so far, at least — the NDP would also continue the accelerated capital cost allowance for equipment used in manufacturing for another two years.

This last measure was introduced by the late Jim Flaherty in 2007 to help “manufacturing and processing businesses make the major investments needed to respond to the stronger Canadian dollar and rising global competition” and it was to apply to investments made before 2009. Well, here we are in 2015. Mr Flaherty, alas, is gone, the Canadian dollar isn’t strong anymore, global competition is if anything falling off, but the supposedly temporary accelerated write-off is still with us. It was renewed when the recession hit, and it was renewed again after that. If even the NDP favours it, even for big businesses, it’s hard to believe it won’t be renewed again. I suppose we need it now because of, I don’t know, the disruption caused by the falling dollar or by all those oil and gas workers who will now be wanting manufacturing jobs or … fill in the blank any way you please.

If we are going to keep renewing the temporary write-off this way, we should probably just go ahead and make it permanent. One thing politicians don’t seem to understand about business, maybe because thinking long-term is alien to them, is that if you do make long-lived investments for a living, it’s good to know what tax regime such investments will face. Maybe when businesses see a measure renewed year after year, they go ahead and treat it as permanent. But why not take the guesswork out of it for them and simply say that’s how we’ll do things from now on?

And why for just manufacturing and processing? What’s so special about them? Where’s the “externality” for the rest of us from the machines they use that isn’t produced by machines firms in other sectors use? For that matter, what’s so special about machines and not other kinds of investment? And why the help for manufacturing right now, when with the low dollar, the slackening labour market out west and down east, and strong, steady growth in the US things are looking better in that sector than they have in years?

It would be nice if an election year didn’t mean having to abandon any and all connection between economic policy and economic reality. A party that said our government won’t play favourites might well end up a lot of people’s favourite.

Central banks can do many things — not all good, some very bad — but offsetting real hits to an economic sector isn’t one of them

It was good to have C.D. Howe Institute President Bill Robson’s clarification/reminder that the Bank of Canada’s recent interest rate cut was all about inflation. With the fall in oil prices, inflation is trending south of the bank’s 2% target. When the forecast is for less-than-target inflation the bank’s rule is to expand. That’s what the forecast said. That’s what the bank did. All is right with the world. What struck the markets as a bolt from the blue was predictable by anyone paying attention to the inflation forecasts. The bank’s policy of transparency and predictability remains intact.

That’s certainly preferable to the story told most places in the media, which was that the bank, concerned by contraction in the oil patch, was doing its best to jolt growth elsewhere in the economy to make up for real economic losses in Alberta. Central banks can do many things — not all good, some very bad — but offsetting real hits to an economic sector isn’t one of them.

If there’s a crisis in the financial markets (one not of the bank’s making, at least), bank action can reassure economic actors economy-wide about how it will provide liquidity and take other measures and be open and forthright about what it’s doing. But when Saudi Arabia gets into a pumping war with the U.S., Russia and Iran there’s not a lot a central bank can do. The sharp drop in oil prices is going to disemploy capital and labor in that sector and moving interest rates up or down won’t help turn rig-operators into die-cutters, home-builders or lab technicians. There’s only so much oil the bank could buy. And we have a national labour market to take care of the adjustment, anyway. It’s not clear what the bank could add.

All that said, it’s hard for anyone who lived through the 1970s to get his head round to the new view that lower-than-expected inflation is a bad thing. Regarding Europe, for instance, the Bank’s Monetary Policy Report says the oil-driven decline in inflation might even reach a point where “inflation expectations could become de-anchored.” What that means is that if European prices flatten out, Europeans may lose faith in their central bank’s promise to deliver 2% inflation. Having less of a bad thing evidently will disappoint them. The promise is what counts. The level of prices doesn’t.

After two decades in which central bankers couldn’t hit the side of a barn door it was important to citizens and central bankers alike that they find a target, almost any target, that they actually could hit. Aiming directly at inflation, rather than obliquely through interest rates or changes in the money supply, has proved a reachable goal. The effect on people’s confidence in central bankers (and on finance ministers when they’ve been able to hit their budget targets) has been positive and helpful. But now after two decades in which central bankers have demonstrated their skill, maybe it’s time to find them a better target.

If, as promised, the Bank of Canada does produce two per cent inflation from now on, then in 30 years, just a generation away, prices will be 75% higher than they are today. In 50 years, through the miracle of compound interest, they’ll be two and a half times higher. In a century, they’ll be fully seven times higher.

Related

Maybe a generation ahead, let alone a century, is too far for policymakers to think about. It might be too far for elected politicians to think about. But central bankers are appointed, not elected, and though in theory they can be fired in practice they’re a lot like judges: once in place, hard to displace. If they don’t think about the long term, who else in the policy loop is going to? Plus, the effect of inflation on the price level is not full of unknowables and imponderables, like the effect of carbon emissions on global temperatures. It’s basic arithmetic. Run inflation at a given rate for a given time and the effect on the price level is certain.

In my history of economics class this term we’ve been reading Roger Backhouse’s lively review of the discipline, The Ordinary Business of Life. Backhouse tells how, as in the rest of Europe, “inflation was a serious problem in sixteenth-century England. In earlier centuries prices had fluctuated, but there had been no long-term tendency for prices to rise, whereas by the end of the sixteenth century wheat prices were between four and five times higher than they were at its beginning.”

Hmm. Prices rising five-fold in a century is a “serious problem.” Since 1914 in this country, the Bank of Canada’s Inflation Calculator tells us, prices in general have risen 19-fold. In the United States in the same period, according to the Bureau of Labor Statistics, they’re up almost 24-fold. In the United Kingdom, says the Bank of England, almost exactly 100-fold. By those lax standards, a future in which prices rise “only” seven-fold in a century may well look like price stability.

But this is the 21st century. Surely with all our economic knowledge and expertise we can do better than the 16th. After all, in the 16h century they didn’t even have central bankers.

Theresa Tedesco reported Tuesday that, as the headline on her FP Street column put it, ‘Canadians’ trust in corporate leaders drops to lowest level since 2008.’ This is based on the ‘Edelman Trust Barometer, which surveys the state of trust in 27 countries. Sorry to say I’d never heard of the Edelman Trust Barometer. I’m more familiar with the Edelman Catch Barometer, which registered nine for the New England Patriots’ receiver of that name in Sunday’s Super Bowl.

The trust numbers are not good. “Only 47% of Canadian respondents said they trusted business, down significantly from 62% in 2014, while confidence levels for chief executive officers dropped to 28% in Canada in early 2015, down from 33% in 2014,’” Ms. Tedesco reports.

You never want to, er, mistrust poll data but whenever I see big drops in a poll number I do wonder if there isn’t something wrong with the survey. The Edelman surveyors look at people’s feelings about NGOs, media, government and business. Next year maybe they could ask how much they trust pollsters.

As to the numbers, did anything so bad happen in Canadian business in 2014 as to justify such a sudden 15-point drop in trust? Gord Nixon did leave RBC but is the new guy really morally reprobate? Burger King took over Tims but are the BK owners truly scoundrels through and through?

That there might be reason not to completely trust the survey results is suggested by a visit to the Edelman website. First, it’s wholly an Internet survey, which can involve problems. But beyond that, one of its key overall conclusions is that, worldwide, “Trust in government increases slightly, driven by big gains in India, Russia and Indonesia…” You get that? There was a big increase in Russians’ trust in their government. Could the rest of us maybe have a vote on that?

Perhaps Russians really did have their confidence in government renewed in 2014. First Mr. Putin’s administration pulled off the Sochi Olympics and then, swiftly and unopposed, it made a large and unexpected real estate acquisition. But if that’s what’s driving an admittedly small increase in worldwide trust in government, well, maybe we needn’t pay too much attention to the rest of the survey results. I certainly hope no major Canadian businesses are putting a trust task force together or getting ready to appoint a VP for trust issues.

Canadian ‘trust’ in business is down, says the same survey that found trust in government is up — in Russia

Trust is a key part of life, of course, at least of happy life. But it’s not at all clear why trust in businesses is important. Adam Smith is probably the most famous advocate of free markets ever. He thought freedom to engage in enterprise was what determined the Wealth of Nations: Britons had that freedom and were therefore wealthy; other countries didn’t and therefore weren’t.

Yet Smith didn’t trust businessmen (only men in those days) any farther than he could throw them. Probably his second most famous quote is “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

He firmly believed conspiracy among business people kept wages down: “Masters are always and every where in a sort of tacit, but constant and uniform combination, not to raise the wages of labour above their actual rate.”

Self-interest is not unvarnished good to Smith. What makes it work in all our favours is competition. If businesses face competition, then they are bound to try to please their clients. If they are monopolies, like the Post Office, they can please themselves.

The Edelman survey and the reception to it seem to assume we should all want to trust business. But trust doesn’t really enter into it, does it? What we want from business is good, reliable products and services delivered at the lowest possible price. In a competitive world, businesses that don’t provide that don’t prosper.

As it happens, based on repeated market interactions over the years, I do trust my barber not to give me an awful haircut or nick me as she snips away. I also trust my dentist to do a reasonable job of caring for my teeth. I trust my local supermarket to sell me food that doesn’t make me sick. Since I was a tyke I’ve been going to the same Big Five bank and so far as I can tell they’ve never misplaced a penny that I’ve, yes, entrusted to them. But if it had been a Big One bank, I’m not so sure that would have been the case.

According to Ms. Tedesco’s report, “the main reason why Canadians are losing faith in the corporate sector is because a 53% majority believe that businesses ‘failed to contribute to the greater good,’ and instead act in their own self interest for profit.”

Well, put me down as one of the 47% (sound familiar, Mr. Romney?) who are happy Canadian businesses have been focussing on profit. That focus, in a competitive environment, is what has given me decent haircuts, good dental care, safe, wholesome food, efficient custody of my financial assets and dozens, probably hundreds of other goods and services that make my life immeasurably better. Forgive me, but I regard that as a major contribution to the greater good.

The always estimable Andrew Coyne, now Editorials and Comment Editor of the National Post, wrote last week that whether or not the federal government balances its budget this year or merely comes close is not a question with significant economic meaning. It will be within half a percentage point of GDP from balance, probably even less, and once we’re down to numbers that small — even if they do represent billions of dollars — any net effect on the economy, even if you still believe in multipliers, will be within the margin of error. We’re a $1,992 billion economy. Two or three or even five billion won’t have an effect on anyone outside the little sector or region chosen for that-sized federal largesse or austerity will notice.

If anything, that view was reinforced by Tuesday’s mini-report from the Parliamentary Budget Office in response to queries about the effects of lower oil prices from a Toronto-area Liberal MP. Despite the dire news from CBC reports, the increase in the “fiscal gap,” the PBO says, is, and I quote: Federal government: 0.0%; Subnational governments: 0.0%; Total government: 0.0%. The only place you’ll see more zeros is on a Leafs’ scoring summary. To elaborate: the fiscal gap is the difference between the current fiscal structure and what would stabilize the debt/GDP ratio; the per cent is of GDP; and all the zeros indicate nothing happens to the fiscal gap as a result of fiscal changes from lower oil prices. Feeling a little underwhelmed?

In fairness, that’s for the most favourable of two assumptions the PBO makes about oil prices, one in which they return to the baseline forecast of $81/bl by 2019-20. If we assume instead they stay at $48/bl for the next five years, subnational governments’ fiscal gap rises by 0.2 percentage points of GDP while the feds’ still doesn’t move. Also in fairness, this estimate from the PBO looks only at the effect of lower nominal GDP, i.e., the effect emerging from lower prices. PBO promises to address the effects from real reductions in GDP, which all forecasters think are coming, in its annual report. On the other, it says its “present judgement is that the impact of lower oil prices on economy‐wide prices is more important for nominal GDP [than for real]”. So what we saw Tuesday is most of what we’re going to get.

If even the PBO thinks there’s not a lot going on economically, does that mean friend Coyne is correct that the deficit debate is now all politics? Actually, it may be all accounting. At the margins it’s always possible to move money in and out of the current budget year according to whichever helps the numbers more. The Liberals in the 1990s were masters of time-shifting. The Tories can probably manage it, too, even if the press will be watching them with a sharper eye than they customarily cast on Liberal doings.

Whether the debate really is all politics depends on what you mean by politics. At its best, politics is about policy. When Mr. Harper says it’s important to balance the budget this year and Messrs. Trudeau and Mulcair say we should wait a year or two they’re not just talking about this year. They’re also revealing overall attitudes. And their attitudes signal a lot about how they would actually conduct policy, which couldn’t be more important economically.

Maybe we do need someone fanatical about getting rid of a deficit as promised, even if the red ink is small?

The PM explained it pretty well in a campaign-style speech in Orleans, Ontario, on Sunday: “With the falling oil prices the government’s fiscal flexibility has been reduced, without a doubt, at least for the short term. To some, that’s a reason not to balance the budget. But to those people there is always a reason not to balance the budget [which is a pretty good line and got a laugh from the crowd]. That’s how the small Trudeau deficits of the early 1970s became big deficits that went on for a quarter of a century and it ended up with the Liberals hiking taxes and cutting our most cherished and essential social programs, health care and education, the biggest cuts any government has ever delivered to those programs… Our government ran a deficit when we were in recession. We’re not in recession now and so we will balance the budget this year.”

CBC’s At Issue panel — of which Coyne is a member — made a big deal about whether it was relevant or fair for Mr. Harper to invoke the Trudeau name in referring to the country’s deficit history. But his point would be as telling without it. This country had a perfectly awful experience with deficits between 1970 and 1995. Successive governments, including Conservative ones, repeatedly promised to get their accounts under control and repeatedly failed to deliver. For anyone who believed in democratic government, which is all of us, the effect was deeply demoralizing.

We got out of that, thanks to groundwork by the Mulroney Conservatives and follow-through from the Chrétien-Martin Liberals, with a big assist from the Reform threat on their right. But almost no Canadians want to repeat that experience or anything like it. Who’s more likely to keep us out of it? Someone fanatical about getting rid of a deficit in the year he promised to, even if the remaining red ink is small? Or someone who argues that it doesn’t really matter, that very little is at stake economically, that we should be more reasonable and sophisticated—exactly the same soothing, know-it-all arguments that caused the debt bubble of the 1970s and 1980s?

Yes, in this hyper-partisan election year the debate will be extremely political. But below the water line it will be seven-eights economics.

So what if Jim Prentice bought a vintage car for $71,000? He earned it. We shouldn’t begrudge it

Things were going so well for Alberta Premier Jim Prentice, if you don’t count the small matter of oil prices collapsing. He won his party’s leadership last September. He brought in a parcel of spending reforms that were so popular his principal opposition basically surrendered, with nine of its members joining his benches. So he’s got an essentially free hand at governing.

But then he puts it all at risk — maybe — by going and buying a car. Not just any car. A $71,000 colonial white 1956 Ford Thunderbird, which he picked up at auction in Arizona over the weekend. A T-Bird with a 313-cubic-inch, eight-cylinder engine from back in the day when gas cost — well, actually, not that much less than it costs right now.

It says a lot about the presumed munificence of the welfare state these days that Mr. Prentice’s press secretary felt it necessary to make clear he paid for the car himself. No, not even in the province that made Alison Redford a synonym for engorged entitlement do the taxpayers buy their premier a T-bird.

So why exactly is this private purchase using private money news? I’m betting most premiers have cars. But I’ve never read about any other premier buying a car. I do remember the press thought it was gallivanting of Pierre Trudeau to own and drive a Mercedes convertible, a car now owned by one Justin Trudeau, who takes it out for a spin whenever there’s no election in sight and presumably will be promising in his job interview this year that all middle-class Canadians get one, too.

Optics is the idiot’s substitute for thought

But really! We’re hearing about the premier’s T-bird basically for reasons of class warfare. Yes, for most people $71,000 is a lot to pay for a car. Yes, for most people it’s more than they make in a year. And, yes, this car isn’t just for getting the premier from the office to Wal-Mart and home. It’s pretty conspicuous consumption, even if he hides it in his garage.

But so what? The premier has money. He was in business both before and after his stint in federal politics. He’s presumably complying with the thicket of conflict-of-interest rules surrounding his job. He pays his taxes (I assume). If he has a taste for old, fast, stylish cars, that’s his business. Or should be.

Albertans knew Mr. Prentice had money before they elevated him to the premiership. People who are successful in business generally do have money. Money is the main measure of business success. Do we really want to exclude successful business people from moving into politics? Would we prefer only unsuccessful business people lead us? Or should we just disqualify business people altogether?

The Postmedia story about the premier’s new car closed, snidely, by talking about how last week Mr. Prentice told Albertans they’d have to tighten their belts to make up for the loss of oil revenues: “We’re all in this together,” he said. (Was this really the Post, I thought as I read that cheap shot, and not the Toronto Star?)

Yes, politics is all about optics. But optics is the idiot’s substitute for thought. Mr. Prentice is right. Albertans really are in their fiscal problems together. You can be sure he and his office will share in any budget-cutting or tax-raising his government imposes. Like most higher-income Albertans he’ll have less after-tax income after his treasurer’s next budget. But in our economic system we let people decide for themselves how they spend their own after-tax dollars. That approach to economics is what makes Albertans so much better off than Venezuelans, who have more oil but a lot less income.

I’m sure Mr. Prentice will be hearing lots of advice about how he should put his new car up for charity auction or some other form of conspicuous self-denial. I hope he ignores that advice and instead has fun, fun, fun and doesn’t let his spin-docs take the T-bird away.

]]>http://business.financialpost.com/2015/01/21/william-watson-fun-fun-fun-till-the-spin-docs-take-his-t-bird-away/feed/0stdThunderbirdWilliam Watson: A world with only 100 economists? The impact of machines on the labour markethttp://business.financialpost.com/2014/12/17/william-watson-a-world-with-only-100-economists-the-impact-of-machines-on-the-labour-market/
http://business.financialpost.com/2014/12/17/william-watson-a-world-with-only-100-economists-the-impact-of-machines-on-the-labour-market/#commentsWed, 17 Dec 2014 14:12:14 +0000http://business.financialpost.com/?p=504095

As automation moves into services, economists fear redundancy — like the blacksmiths of a century ago

There’s far too much “visioning” in this society and not nearly enough hindsight, too much looking forward, too little looking back. Hindsight isn’t always 20/20. And different people will always have different views about exactly what happened in the past. But the past has the distinct advantage of having actually happened. There’s a body of facts there, not necessarily agreed-upon facts, but real data to work with. About the future, by contrast, we haven’t a clue. It hasn’t yet generated its data.

What sparks this outburst on the deeper meaning of time is a new offering from Nouriel Roubini, “Dr. Doom,” in which he worries that the microchip may eventually put man him and herself out of business. Machines, he fears, will take away all the jobs. When this subject was written about in the 1950s the threat was called “automation.” Roubini notes that despite dire predictions about “the end of work” the U.S. unemployment rate has averaged pretty much five per cent ever since —albeit with occasional cyclical deviations. Manufacturing jobs have disappeared as industrial machines have become ever more productive. But our employment bacon has been saved by services, the growing demand for which has soaked up the resulting supply of willing workers.

But what if the machines learn how to do services, as now seems to be happening? What then? To drive that point home with greatest dramatic effect on his presumably most critical audience Roubini notes: “It becomes possible to imagine a future where the top 100 economists in the world … can provide high-quality and cheap online courses in their field. Those changes, however, would mean displacing the jobs of hundreds of thousands of other economics professors in the process.”

Ouch! For someone whose day job is teaching university economics that strikes uncomfortably close to home. But point taken.

One possible complication, though, is whether there wouldn’t need to be some sort of minor league in which those top 100 would have to learn how to teach and impress scouts, as it were. The first generation of the top-100 have all distinguished themselves in our current highly labour-intensive system. But where would their replacements come from without any place to practice?

There would also inevitably be an undesirable loss of diversity and idiosyncrasy from having only 100 people doing all the teaching. Some schools and students might decide there was still a market for hands-on interaction with a real, live human being.

But I’m sounding like a trade unionist. The market would decide all this, as it should. If 100 people really could do all that teaching and do it up to a standard that satisfied professional norms, that would be wonderful, literally. Tens, maybe hundreds of millions of people the world round could have an experience so far reserved for those able to pay Ivy League tuition — assuming, perhaps, incorrectly, the best economics teachers are in that League. And the labour of all the rest of us would be freed up — even if it wouldn’t be liberty we’d exactly relish. Perhaps we would do more applied analysis (though Roubini thinks machines eventually will do that, too). Or commentary. Or more research, if we’re not teaching. Or any number of things, some completely different, many currently unimagined and, for the moment, unimaginable.

Why I might be pushed into taking up work as a hindsight specialist

Granted: The transition, especially if sudden, could be rough on those of us outside the golden 100. Michael Ignatieff, who was rendered redundant himself after the 2011 election, has suggested we may need a new Bismarck to provide social programs for managing such bruising technological transitions. But we have extensive social programs already to help those who have lost their jobs for whatever reason. That, plus who succeeded him, are good reasons to sink the Bismarck idea.

Ignatieff also praised Victorian-era interventionists for having stressed education. But rising educational standards weren’t without cost. Alfred Marshall, the greatest Victorian economist, observed in 1890 that because of the surge in education “any one can be easily taught to do the work of a copying clerk… When all can write, the work of copying, which used to earn higher wages than almost any kind of manual labour, will rank among the unskilled trades.”

We forget: “Scriveners” used to make a very good living copying things out by hand. Where offices now have photocopiers they used to have actual humans, copying. The U.S. Census of 1900 listed 630,127 “clerks and copyists,” which was more than 2% of all employment. We don’t know just what proportion were copyists but copying documents by hand was still an important enough occupation to get separate mention, even if the tap-tap-tap of the typewriter was tolling its doom.

The same Census listed 65,400 “hostlers.” A hostler was the person at the inn who took care of your horse. There were also: 4.4 million — 15% of the total —agricultural labourers, with more than 10 million in total in agricultural occupations; 5,386 “sextons” (who looked after churches and churchyards); 33,686 livery stable keepers; 538,933 “draymen, hackmen, teamsters, etc.,” who were involved in the care, feeding and driving of horses; 12,690 elevator operators; 13,505 wheelrights; 226,477 blacksmiths; 37,200 coopers (who made barrels); 346,884 (more than 1% of total employment) dressmakers; and 150,942 seamstresses (not seamster-persons).

These data cover everyone gainfully employed from 10 years of age up. Ten — though only 14.8% of children 10-14 were in fact employed. The overall employment rate for males over 10 was 80%. For females, however, it was only 18.8%, in large part because home-making machinery was still rudimentary. Women worked — hard — at home. Only the 20th-century advent of household machines liberated them from debilitating drudgery.

The now largely vanished jobs listed above constitute what, maybe 40% of total employment? And much of it was service employment. Services obviously were not immune from obsolescence. And yet today the U.S. unemployment rate is almost back to its five per cent long-term average. All the blacksmiths and grandchildren and great-grandchildren of blacksmiths have found other kinds employment, no doubt some of them as economists.

As for me, if economics fails, I’m taking up work as a hindsight specialist, making use of the miraculous technologies that got me to the 1900 census data within about a minute and a half of my discovering I had a demand for them. I bet a world in which machines do all the dull work will have a virtually insatiable demand for being told about itself.

That’s a pretty comprehensive list of requirements Industry Minister James Moore came up with before agreeing Thursday that the Burger King/Tim Hortons merger was in the national interest and could therefore go ahead: maintaining “100 per cent of existing employment levels” and “100 per cent of … current charitable work and involvement in communities across Canada”; insisting expansion of the Tim Hortons brand “both in the U.S. and globally” proceed “at a significantly greater pace than currently planned”; keeping Tims pure by not allowing “co-branding” of any locations in Canada or the U.S.; and establishing the new company’s headquarters in Oakville, Ont., “with significant employment levels at that facility.”

And yet there’s so much more the minister could have done to ensure this strategic national asset remains properly preserved.

To start with, make BK rename its Four-Cheese Whopper the “Double-Double.”

And the doughnut glaze. You just know a profit-oriented, cost-cutting operation like Burger King will want to replace Real Ontario Honey Glaze with some sort of low-grade fructose syrup. This was the minister’s chance to stand up for Ontario bees and bee farms and bee-farm families, and he refused to do it.

THE CANADIAN PRESS/Sean KilpatrickWhy didn't Industry Minister James Moore force Burger King to rename its Four-Cheese Whopper the “Double-Double”?

Then there’s the darkness of Tims new Dark Roast. Does the government really think it’s dark enough? Shouldn’t it be roasted a little longer? I don’t know. Maybe it’s just me, but the taste doesn’t seem quite right. The minister had the chance to address this and he flat-out flunked the test. So many people around the world when they think of Canada, think of coffee. So it’s absolutely imperative we get this important national branding moment right.

And could we not have insisted that a framed picture of the late Tim Horton be displayed in every BK restaurant worldwide? And stipulated with careful wording in the memorandum of understanding that he be wearing his Leafs jersey, which is what he wore when he opened his first restaurant, and not his Rangers, Penguins or Sabres gear? In fact, why didn’t the minister require all BK employees to wear a little Leaf logo on their collars? Could there be a more pro-active way to promote Canada globally?

I could go on, but maybe the point is clear: Once you start micro-managing a major corporation there’s no end of detail you’ll be tempted to meddle in.

Burger King stands to save a lot of U.S. taxes on the “corporate inversion” it’s undergoing by moving its headquarters from the States — one of the last through the door before Barack Obama’s executive order recently slammed it shut. The custom in the world of Big Government, as we’ve come to live it in the postwar world, is that host governments to profitable mergers get to step up to the trough and help themselves to heaping platefuls of the gain. Usually they do this with guarantees on well-paid (if not necessarily important) management jobs and a commitment to locally commissioned avant-garde architecture at company headquarters.

But requiring new Tim Hortons restaurants around the world to be opened “at a significantly greater pace than currently planned”? Either BK is signing up for something it wants to do anyway, given the improving U.S. economy, or the minister is getting into the business of making decisions that in most market economies — traditionally even here in Canada — have been left to business managers. Why in the world would he take it upon himself to require faster expansion than the business itself thinks wise?

I suppose the answer is the federal election. I suppose the answer to every question for the next 10 months is the election. If James Moore is already micro-managing Tim Hortons and Burger King, voters might think there’s no need to put in Tom Mulcair to micro-manage Tim Hortons and Burger King.

There’s no electoral threat on the right. (Where oh where, is the Reform Party when we need it?) So all the divisions can be positioned to protect the Tories’ left flank, which is now the only flank they’ve got. Maybe in the short term it will work. But in the long term, say again what the point is of a “Conservative” party that thinks the government should be directing the rate of expansion of doughnut franchises around the world? Or how they should be arranging their charitable giving? Or who should sit on their board of directors?

The long-term damage may be more than political. Over the past month the Department of Finance has announced investments totalling $200 million in new venture capital funds to be managed by private companies in, so far, Montreal and Toronto. The minister of finance says he has to do this because no one in Canada does venture capital.

Do you suppose the reason venture capital doesn’t thrive here might be that would-be Canadian entrepreneurs understand in their bones that, no matter how successfully they’ve built up their business, some day, some way, the government will come in and tell them how to run it?

University degrees pay off for students – most of them female – and the debt levels aren’t worrisome

When do you suppose universities will change the name of the first degree they offer from “bachelor’s” to “bachelorette’s”? Statistics Canada’s National Graduates Survey, which every so often catches up on recent university graduates, is out this week and it shows that 61% of the 196,700 (generally) young people who got a bachelor’s degree in 2010 were female.

Various online sources suggest that while the medieval “baccalaureus” did refer to a young squire aspiring to advancement the term may also have to do with the laurel berries “bacca lauri” traditionally given to victors or achievers of one kind or another. So the “bachelor” in the degree may already be gender-neutral. But you’ve got to think it’s not going to stand forever.

What might replace “bachelor’s degree”? “First degree” sounds neutral though it carries a hint of painful interrogation. The true third degree, the doctorate or PhD, is now also a female thing. For the first time, in this latest batch of graduates StatsCan has studied, 51% of new doctorates are PhDs. Women also account for more than 60% of new Master’s students, another gendered designation that I guess will be campaigned against, too.

The public’s or at least the media’s association of education with the highly unpleasant “third degree” has to do with the precarious economic situation new graduates are assumed to find themselves in upon completing their studies. In particular, student debt is widely regarded as being at crisis levels. But the latest Statistics Canada numbers suggest we may need to re-think that. (You can see them for yourself at CANSIM Tables 477-0062 through 477-0071.)

Related

You’d think 2010 would have been one of the worst possible years to graduate, at any level of education. Yet three years out — the Survey now follows up after three years rather than two, which makes comparisons with earlier years unhelpfully difficult — things look decidedly less than horrible.

Ninety-one per cent of bachelor’s graduates were employed. Another 4% were out of the labour market. Which makes for an unemployment rate of 5%, compared to 7.1% in 2013 for the population as a whole. The employment rate was a tad higher (92%) for both Master’s and PhD grads. True, full-time employment was lower than that: 84%, 87%, 83%, respectively, for Bachelor’s, Master’s and PhD grads. But the rate of full-time employment for each degree was actually higher than in the 2000 and 2005 follow-ups. Having had an extra year of job search before the survey was taken may help explain the improvement but, in any case, the numbers aren’t exactly dreadful.

Median gross earnings for bachelor’s grads three years out were $53,000; for Master’s, $70,000

The usual view is that most of these new graduates were serving periods of indenture at McDonald’s or driving cabs — or maybe now that would be offering drive-sharing services through Uber. But again, the salaries people have been reporting don’t look terrible. Median gross earnings for bachelor’s grads three years out were $53,000; for Master’s, $70,000; and for PhDs, $75,000 (though that $5,000 annual difference between Master’s and PhD suggests either the extra years to get the doctorate are a lousy investment or there may be non-pecuniary benefits to the PhD that salaries don’t capture).

Of course, some graduates are doing much better than median. People at the 75th centile in each group — that is, one quarter of the population down from the top — were making $68,600, $88,000 and $96,000, respectively, which doesn’t seem half bad, though they do have to pay taxes on that, which is probably the biggest sticker shock people with brand new degrees face.

We’re also often told about the “crushing” burden of debt — debt’s burden is never anything but crushing — new graduates bear. Yet again, the numbers suggest that in most cases debt is probably manageable. Bachelor’s graduates did average $26,300 in debt at graduation. On the other hand, more than a third had paid off all their debts by the time of the Survey interview, while the average remaining debt for those who had it was $19,800. Compared to median gross earnings of $53,000, that’s not so bad.

At the Master’s level, average debt at graduation was slightly higher: $26,600. But this time 44% had paid off their debt by the interview, while the average remaining debt for those who did still owe was $21,000, less than a third of average gross earnings in this group.

Finally, new PhDs averaged fully $41,100 in debt at graduation but 36% had paid it all off by their interview, while those who still owed remained in the hole for $40,200 on average. But again: median income for this group was $75,000.

As stats majors know, averages and medians never tell the whole story. The worst combination would be to have above-median debt and a below-median salary, and you can be sure intrepid CBC reporters will find such people — in fact, maybe some of them are such people. But, given the continuing employment and salary payoff to university education, our sympathy and redistribution are better directed not to degree-holders, whatever their degree may be called, but to people at the bottom of the education and income ladder.

University of Chicago finance prof John Cochrane had a piece in the Wall Street Journal the other day arguing that a little deflation wouldn’t be as bad as Keynesians are making it out to be. Fear of the potentially disastrous effects of a deflation death spiral seems to be the main thing now dissuading central banks from ending six full years of extraordinarily expansionary monetary policy even as unemployment rates finally settle back toward pre-Crash levels.

Cochrane argues that sharp, sudden deflation might well cause trouble. But a gentle, anticipated deflation, if it resulted from a return to monetary normalcy? Probably not.

Related

I read Cochrane’s piece shortly after finishing a fascinating paper (really!) on Sir John A. Macdonald’s National Policy by Eugene Beaulieu of the University of Calgary and Jevan Cherniwchan of the University of Alberta published in the Canadian Journal of Economics earlier this year. To digress for a minute, they argue the hiking of tariffs in 1879 and their gradual fine-tuning over the next 20 years may have been more to raise revenue — tariffs were 60% of federal government revenue at the time — and less to protect Canadian manufacturing, as has always been the Canadian nationalist-interventionist line. Their evidence is that tariffs were by far the highest on goods, like coffee, tea, and spices, that had no substitute in Canada and so did not cause Canadians to waste scarce resources trying to produce them here. As a result, the overall efficiency cost to the Canadian economy was relatively small: between 1.0 and 1.5% per year — not nothing but not gigantic and not as big as has always been assumed.

What especially caught my eye, however, was a column in one of their data tables showing the seemingly random walk prices took during the National Policy period. In 1870, the GDP deflator was 104. (The GDP deflator is a price index for all final production in the economy.) The base year for this series was 1900. 1900=100, 1874=104. Get that? The price level was lower in 1900 than it had been 30 years earlier.

At five-year intervals starting in 1870, the price level reads: 104, 108, 104, 100, 104, 91, 100. Not quite a random walk. It goes up and down, up and down, which isn’t random. But the “trend” is flat: There’s no trend. Periods of (mild) inflation are followed by periods of (mild) deflation and vice versa. By contrast, in our own inflation-soaked era, the GDP deflator rose almost 250% between 1980 and 2010.

So what was happening to the real economy during this period of up-and-down prices fluctuating around a given mean—a pattern you might actually think of as “price stability”?

According to Statistics Canada, real GDP per capita rose 64%, real gross domestic income per capita 72%, and real gross national income per capita 68%. No wonder Sir John A. kept getting re-elected!

What happened in our own supposedly growth-friendly inflationary age? In the 30 years from 1980 to 2010 the same three variables increased 52, 57 and 59%. Not bad, but not like the end of the 19th century.

Now of course a lot goes into determining economic growth and this simplistic correlation doesn’t take account of all the other reasons why growth may have slowed since then, including debilitating taxation and stifling regulation, as well as some reasons it may have increased: the entry of many women into the paid workforce, for instance. Still, it’s at least interesting that over 30 years in which the Canadian economy was perfectly free from inflationary bias our real economic growth was, well, “spectacular” wouldn’t be too strong.

It would obviously be a stretch to argue that today’s economy would react to deflation in the same way as the economy of the 1880s and 1890s did. On the other hand, though telegrams were slower than tweets, and typewriters less powerful than tablets, when we think about how people respond to the prospect of changes in the value of money what we’re dealing with is human psychology. Are we sure that’s changed in any fundamental way? Our knowledge of our DNA is much different than it was 100 years. Our DNA isn’t.

Central banks have been sitting on financial markets for six years now. The main argument against returning to something closer than normal is that doing so would risk deflation, which could only be disastrous. But if one of our main historical experiences of deflation was basically positive, even if it was long ago, should we really be so afraid?

The world may now have more than enough bilateral and plurilateral deals

It’s still a year out from the next federal election but the Liberals are in danger of looking slow off the policy blocks. The Conservatives and NDP have already committed big chunks of the surplus to family policy. If the Liberals do the same, they risk “Us, too!” marginalization.

If they’re looking for something edgy and out-of-the-box and yet consistent with the original philosophy of liberalism, how about unilateral free trade: eliminating all remaining tariffs and as many non-tariff trade barriers as possible? It would cost $4-billion to $5-billion a year in tariff revenues — roughly what the other parties are spending on their initiatives — but it would offer lots of advantages, including looking smart, innovative, economically hip and forward-going, competitive and concerned with making the economy work better rather than simply treating it as a milch cow, which is always something you worry about with Liberals.

The main benefit of unilateral free trade — which maybe needs a new marketing approach, say “Proactive free trade,” since another “unilateral” thing countries do is surrender — is that it makes it easier for all your firms, big and small, to work their way into productivity-boosting global value chains. Dozens of emerging economies have discovered this route to success. Their decision to make life easier for businesses trying to build world-wide production webs is the main reason unilateral tariff reduction has accounted for up to 70% of tariff reduction worldwide over the last three decades. Countries have figured out that border barriers are bad for business and have simply swept them aside.

Related

While emerging economies were doing that we were busy negotiating bilateral free trade deals with our major trading partner and then with several other micro-partners that we mainly wanted to have nice diplomatic relations with. That wasn’t a bad thing to do, especially the Canada-U.S. deal. Most of our trade was and still is with the U.S. and anything we could do to regularize it was likely to pay off for us in terms of more investment and better jobs.

But the world may now have more than enough bilateral and plurilateral deals. Upwards of 400 have been registered with the WTO. Most countries are party to several, which means they currently operate in a spaghetti bowl of overlapping rules and competing preferences handed out under different deals. Unilateral free trade — cutting all your tariffs to zero — sweeps away most of these complications.

That includes the major complication created by the “rules of origin” that are part of any free trade agreement. FTAs don’t let all goods in for free. They only let partner goods in for free. To take advantage of the preference the FTA provides you’ve got to prove the goods you’re trying to bring in really are partner goods. That imposes an accounting and paperwork burden that many firms, especially small firms, decide not to impose on themselves. So they continue to pay the tariff even if they could be paying zero. In effect, rules-of-origin obligations impose a fixed cost on importers and exporters. Like all fixed costs, they disproportionately penalize small operations, which is a pity, since many small firms might be able to get bigger fast by exporting.

The argument so far is based on “Should Canada unilaterally adopt global free trade?”, a research paper by economists Dan Ciuriak and Jingliang Xiao that was commissioned and published last spring by the Canadian Council of Chief Executives. As I learned in an exchange with the CCCE earlier this year about another of their research papers, such papers don’t necessarily carry the endorsement of the Council but rather are “part of an effort to articulate a vision for the future of Canada’s trade agenda.”

Fair enough. But organizations like the CCCE seldom publish research leading to conclusions they fundamentally oppose. I’m betting the paper is a testing of the waters, a hoisting of a trial balloon up the flagpole to see if anybody salutes it.

After walking through these arguments for a clean sweeping away of tariffs, Ciuriak and Xiao present the results of the now-obligatory general-equilibrium computer model. The older I get the more I think the world is just too complex to be accurately modelled even with the most powerful new methods. But for the record they find that although the results naturally vary with the precise assumptions made, the economic gains from free trade seem to be around 1%, the same order of magnitude as from the new deal with Europe. One percent of GDP is about $18-billion and such benefits are permanent, i.e., they recur every year.

Will the Liberals go for free trade? Probably not. The politics aren’t easy, especially in protected agricultural sectors like dairy and poultry. And the left-wing of their party probably doesn’t want to leave anti-trade to the NDP.

But it would be new, fresh, bold, forward-looking, evidence-based and on balance, pretty sensible. All that is a combination you’d think some political party eventually would want to take up.

Since the 1980s, seven Asian economies have grown at a scale and speed of development unmatched in history.

Pessimism is journalism’s lifeblood. Violent crime may be way down but “micro-aggression”—you know, people making unfriendly sidelong glances — is way, way up. Woe is all of us!

So it’s a refreshing change to scroll through the WTO’s newly published World Trade Report 2014. The template for these WTRs is that their first 30 pages or so summarize what’s happened to international trade over the last year, while the next 200 provide a state-of-the-economic-art discussion of some aspect of trade theory or policy. This year’s special topic is the influence of trade on economic development, the name we give to economic growth in the poor countries.

Journalists beware: Most of the news in WTR2014 is good. The WTO does its due diligence in searching for bad effects from three decades of unprecedented income growth in much of the formerly very poor parts of the world. There’s genuflection to environmentalism and the need for better pollution control in economies rapidly liberating themselves from poverty. And there’s much cautionary language about the drawbacks of inequality. But basically the news is good. Phenomenally good, in fact. As the report puts it “Since the 1980s, seven Asian economies [China, Hong Kong, Singapore, Korea, Taiwan and Thailand] have grown at an average of 8% a year for more than 25 years — a scale and speed of development unmatched in history.” Yes: Unmatched in… history, i.e., all of human experience, though admittedly the quarterly GDP data isn’t so good from our paleolithic period.

We’ve had an economic setback since the crash of 2008 but, looking past short term ups-and-downs here-and-there the economic news in the two decades before that was almost unremittingly good, and even since then the developing countries have had faster and higher bounce-backs than the rich countries — which, if you were planning a worldwide recovery, is more or less what you’d want. In all the short-term fog, we shouldn’t lose sight of the fact that, as the UN Human Development people put it in 2013: “never in history have the living conditions and prospects of so many people changed so dramatically and so fast.”

Twin Peaks was the title of a trendy/arty TV show in the 1990s. If the WTO wanted an edgy title for its trade report, it might be “Third Peak.” The graph of the world’s income used to be a twin peaks affair: Lots of people at the very bottom and lots of people at the very top. Now there’s a third peak in the middle. Sustained growth in the Asian countries mentioned, plus India, plus Brazil, plus much the same in a couple dozen smaller developing countries, have propelled literally billions of people to incomes that, while still far short of rich-country levels, are far beyond what even the boldest of optimists would have predicted in the 1960s and 1970s.

The WTO does recognize that it would be wrong to attribute all this unprecedented progress to trade alone. Technological change, shrinking distance, the spread of education, public health measures and probably a dozen other factors, including the abandonment of unproductive ideology, or ideological unproduction, have contributed. But it’s hard to avoid the conclusion that trade has been critical. Barely three decades ago China was the world’s 32nd most important exporter. Now it’s number one. That it could have experienced double-digit growth selling only to its domestic market does seem unlikely. In 1985 China’s average MFN tariff was 40%. Now it’s under 10%. In the positive-sum business of trade, selling to richer foreigners has fuelled China’s growth while China’s growth has helped foreigners become even richer.

Much of the improvement, especially in the last 20 years, has been due to the emergence of global value chains, which recent research suggests aren’t literally global but rather are mainly regional: Distance does still count for something. Increasingly, it’s useful to think in terms of “headquarters economies” — the U.S., Germany, Japan and to a certain extent China — that buy from and sell to lots of countries, though mainly those within their geographic orbit and factory economies that mainly deal with the local HQ economy. As there are only four HQ economies — or maybe three and a half since China only partly qualifies — and they’re all mega-economies, we in Canada shouldn’t feel shame in being a factory economy. Everybody apart from the big four behemoths is.

More good news is that despite 2008 there has been minimal backtracking on openness to trade, both in absolute terms and compared to the disastrous 1930s experience of competitive protectionism. Unwisely but also probably unavoidably, the WTO concludes with a chapter on its own role in facilitating the productive integration of the world economy and preventing a post-Crash return to autarky. Unsurprisingly, it concludes its effect was positive. That’s probably true but it’s not a research project the WTO itself is best placed to conduct.

The bottom line? Cheer up, everybody. If you can set aside the sackcloth, ashes and hemlock for a minute, the trends have been mainly good.

Even mainstream economists recognize disease can be an exception to the market-usually-works rule

There’s an ironic twist to the fact that the White House of liberal-Democratic Barack Obama is at odds with the State House of somewhat-conservative-Republican Chris Christie of New Jersey over Governor Christie’s ordering a 21-day quarantine for health care workers returning from Ebola-struck areas of Africa. Mr. Obama is normally a supporter of aggressive government action while Mr. Christie is not — except when government-induced traffic jams on bridges his office controls can embarrass his political opponents. Earlier this year he fired his deputy chief of staff when her role in such a scheme came out.

What thickens the plot further is that, in a refreshing change from partisan gridlock, on this issue Mr. Obama is also at odds with New York’s liberal-Democratic Governor Andrew Cuomo over a similar order in his state. Both Mr. Christie and Mr. Cuomo are possible presidential candidates in 2016 and may therefore be more sensitive to voter sentiment than Mr. Obama, who, in more than one sense, is done with voters.

The White House’s argument for not requiring a quarantine is that if health-care workers and soldiers returning from helping fight Ebola on its front lines have to withdraw from society for three weeks, that will discourage them from going in the first place. Really? The first three Apollo crews back from the moon immediately donned bio-suits and went into quarantine in a big silver converted Airstream trailer lest they transfer moon bugs to Earth. As it happens, their quarantine was 21 days, too. History records that it didn’t stop any of them from signing up. True, being one of the first nine men to visit the moon may have been a bigger draw than helping out against Ebola. They might have been willing to endure a year’s quarantine if that had been the deal. But still, what’s being asked is only 21 days.

Related

The quarantine does raise the cost of volunteering. In addition to the danger of potential exposure in Africa you face the inconvenience, though no more than that, of temporary removal from social circulation on your return. If Mr. Obama wished to reduce the disincentive, he could pay volunteers for their involuntary downtime and in other ways make it as painless as possible.

In a letter to The New York Times, returned health care worker Debbie Wilson argues the classic libertarian case for laisser-faire even when third parties may be involved: “Why, as Governor Christie implied, would I not comply with self-monitoring when it will be what saves me? Imagine the anxiety that I lived with upon my return wondering if my temperature would spike?” Adam Smith couldn’t have said it better. Other people may be implicated in Ms. Wilson’s behaviour but her personal interest in doing the right thing is so strong it may well get done anyway, to the benefit of unnumbered potential infectees.

On the question of others’ implication in her behaviour, Ms. Wilson says “Why does anyone think I would risk someone else’s catching Ebola? I have seen firsthand what an awful sickness it is.” Catch-22 for Governors Cuomo and Christie: Someone who takes the risk of going to Africa to help does seem an unlikely candidate for reckless and uncaring behaviour upon arrival home.

But even mainstream economists recognize that communicable disease can be an exception to the market-usually-works rule. In its current form, Ebola can be transmitted only by direct exposure to the bodily fluids or excretions of an infected person. Ms. Wilson and other returned workers obviously do have an incentive to monitor their temperature and seek help as soon as it rises. But will they always be in complete control of what happens between their noticing a temperature spike and the first onset of the extremely unpleasant symptoms? If they haven’t isolated themselves, or been isolated, can they guarantee they won’t accidentally infect someone? Her letter suggests Ms. Wilson is implicitly trustworthy. Will that be true of everyone returning from that part of the world?

No one disagrees that some sort of monitoring of returnees is necessary, be it self-monitoring by health-care professionals, supervised monitoring via daily or twice daily phone calls to health-care workers, or outright quarantine. It boils down to a decision about which form of monitoring will work best. Federal authorities not having handled the first few U.S. cases so well, maybe the states should get the benefit of the doubt. Plus, if Washington’s new Ebola Czar makes a mistake, the whole country is affected, while if Mr. Christie does, only New Jersey is, to begin with at least.

Of course, if Governor Christie’s management of lane closures on important bridges is any indication of how efficiently his government would run a quarantine, it would be best to leave monitoring in the hands of returned practitioners themselves, theoretical market failure or no theoretical market failure. That’s obviously not a conclusion you would expect either the Governor or the President to come to, however.

Canada’s ‘neo-liberal experiment a dismal failure.’ When exactly did it take place?

Reading the federal election coverage that has already begun you get the feeling we’re all going to be very relieved a year from now when the votes are counted — almost no matter who wins.

Almost.

John Ivison’s summary in Saturday’s National Post of the report card four well-known economists gave the Harper government was a creditable and interesting piece of journalism. Its only downside is that it is the first of what likely will be far too many such exercises.

Related

The trouble with judging a government’s performance is that, done well, it’s an exercise in counterfactual analysis: What would have happened had a different government been in place? The trouble with that is that it’s hard to know both what an alternate government would have done and what the effects of its different choices would have been. Done poorly, of course, report cards on a government are simply a summary of all the good and bad things that have happened to the economy with full credit or blame going to the governing party whether or not events are plausibly its doing.

In Mr. Ivison’s exercise the government’s harshest critic was Scott Clark, deputy minister of finance in the Chrétien government. On debt and deficit Clark gives the government a C, on taxes a D, on jobs and growth D, and on income and income inequality a C, with a final grade of D — which seems a little harsh since his numerical average is D+ or C-. Ivison quotes Mr. Clark and his co-blogger Peter DeVries, who also held high positions in the Department of Finance during the Liberal years, as calling “the neo-liberal experiment in Canada a dismal failure.”

I guess I missed that experiment. When exactly did it take place? The current government takes greatest pride in incrementalism, not experimentalism, whether neo-liberal, neo-conservative or neolithic. A comment like that makes you wonder whether the pair held and pushed such strongly anti-neo-liberal views when they were in government. Maybe conservatives who go to Ottawa believing the bureaucracy is against them aren’t so paranoid after all.

The three other economists Mr. Ivison polled — Derek Burleton of TD Bank, Ted Mallett of CFIB and Glen Hodgson of the Conference Board — give the government better marks and greater credit for first devising and then unwinding a fiscal plan appropriate to the severity of the recession.

Mr. Clark, by contrast, thinks the government should have kept its foot on the fiscal gas longer and today should be pursuing a Made-in-Canada growth plan by building more infrastructure.

I don’t know what it’s like in the rest of the country but if we get any more infrastructure projects here in Montreal traffic will lurch to a complete stop. Cartoonists fed up with construction gridlock have proposed we replace the fleur-de-lys with the orange traffic cone as the province’s symbol. We’ve had a major bridge repair program underway for the last five or so years, ever since an overpass collapse in suburban Laval killed five people. We’ve been building two separate billion-dollar plus — depending whether you count the graft — super-hospitals. We’re about to start a $3-$5 billion replacement of the Champlain Bridge over the St Lawrence. And digging has begun on a major, several-year overhaul of the city’s biggest interchange, replacing now-crumbling elevated serpentines and clover leaves put in for Expo 67.

When the Conservatives were elected in the first quarter of 2006 “total general government gross fixed capital formation” was running at $54.0 billion a year in Canada, measured in 2007 dollars. By the third quarter of 2008, under the stinging lash of neo-liberalism, that was up to $60.5 billion. Granted, that number includes spending by all levels of government. But you’re not a very good federal neo-liberal if you can’t crush provincial spending by slashing transfer payments, as the Liberals did in the 1990s, when, along with many other good people of course, Mr. Clark worked in Finance.

After the Crash — beginning shortly before it in fact — “Total business fixed capital formation” fell sharply, from $316 billion in 2008:Q2 to its trough of $254 billion in 2009:Q2. In response, as Keynesian text would ordain, government fixed capital formation grew, from the aforementioned $60.5 billion in 2008:Q3 to $$68.4 billion a year later to its post-Crash peak of $73.9 billion a year after that. Maybe it should have gone higher faster. But everyone with experience of such things testifies it’s hard to spend billions of dollars fast. A more than 20% increase in 24 months ain’t bean bag.

Government capital formation has retreated a little since then. It was down to $66.1 billion in the second quarter of this year. But perhaps it’s not needed as much as it was. Business investment was back up to $327 billion in Q2, almost $73 billion above its trough in 2009:Q2. And what our governments are spending is in real terms 22% more than when the Tories came into office.

Maybe we should be investing even more. Maybe we should have two or three new bridges across the St Lawrence and every other major river. Maybe we should have a new human rights museum or museum of civilization or Department of Finance building in every major city in every province—even the provinces where there aren’t major cities.

But maybe the relatively rapid build-ups and the slower build-downs the Tories engineered weren’t half bad. Which, though no one will say so for the next year, is pretty good for human decision-makers.

A surplus is a money-printing machine that allows us to at least consider almost any new initiative that can be imagined and lobbied for

That loud slurping you hear is mass salivation over the prospect of spending our emergent slurplus. Sorry: surplus. Which seems unlikely to be emergent for very long, given the salivation and drooling announcements, including the NDP’s fresh plan to fund national day care at only $15 a day.

Some fish apparently eat their young — though not all their young, or they’d be fossils, not fish. Judging by the gathering feeding frenzy, we are about to devour the surplus, which is a form of eating our young: If you leave the surplus alone, it gradually eliminates the debt, which is good for future generations that won’t then have to pay interest on it or re-pay principal. Of course, fans of spending the surplus argue that if you devoted it to long-term investments, bridges and roads, say, or more money for my profession (university professors), that would be even better for our children in the long run. The problem with that argument, however, is there are so many potential slips between lip and cup.

Our basic error is thinking in terms of surpluses and deficits. A deficit we see as a kind of infinitely wide, infinitely high stone wall into which new plans for spending or tax cuts smash and are pulverized. A surplus, by contrast, is a money-printing machine that allows us to at least consider almost any new initiative that can be imagined and lobbied for.

The important thing for government is not to do things which individuals are doing already

We should forget about deficits and surpluses and instead think about necessary public spending and the revenue to pay for that spending. When revenue doesn’t cover spending, we shouldn’t automatically raise the one and cut the other, at least not right away. There may be good reasons in the short run and maybe even in the long run to pay for current spending with borrowing, that is, taxes on future citizens rather than taxes on current citizens. Future citizens may, as suggested, benefit from the spending — though it will always be hard to tell how much and they aren’t yet around to voice their opinion. There could also be short-term macroeconomic reasons for not taxing current citizens unduly. The longer the short term goes on, however, the more the cost gets shifted to future citizens, which seems less and less fair.

When revenues exceed spending, as they soon will do, we should have a debate about how much we can prudently trim the excess, which there’s no need for citizens to pay any more. Instead, we usually have a debate about how we should spend the surplus. Strictly speaking, some people argue we shouldn’t spend it at all but should turn it into tax cuts. But so many tax cuts these days favour one group, project, cause or another that they might as well be spending. The formal name for this sort of thing is in fact “tax expenditure.” Our choice, in effect, is to spend the surplus or to spend the surplus.

Related

What policies would not constitute spending it? Letting the surplus accumulate would gradually reduce the debt and relieve unspecified members of future generations of tax obligations. The debt ratio will come down on its own, of course, so long as GDP, the ratio’s denominator, grows more quickly than the debt. But continuing to run a surplus would actually subtract from the debt and reduce the ratio even if GDP growth were to stop entirely.

Nor would broad-based tax cuts constitute spending, taking spending to mean favouritism for some group or other. True, reducing tax rates will favour the social group “taxpayers.” But it is a very large albeit not universal social group.

If we do consider spending the surplus, it would be best in doing so if we had guides. My guide is John Maynard Keynes, not vintage 1936, the year of his General Theory, but vintage 1926, the year of his lecture “The End of Laissez Faire.”

“The most important Agenda of the State relate [sic] not to those activities which private individuals are already fulfilling, but to those functions which fall outside the sphere of the individual, to those decisions which are made by no one if the State does not make them. The important thing for government is not to do things which individuals are doing already, and to do them a little better or a little worse; but to do those things which at present are not done at all.”

By this Keynesian criterion the state has gone well beyond its optimal size. Canadian parents currently find daycare for their children or provide it themselves. By Keynes’ criteria, the government doesn’t need to do this. But if Thomas Mulcair and the NDP have their way, we’ll spend the federal surplus providing $15-a-day daycare to all parents. If Quebec experience is any guide — and since his caucus is overwhelmingly from Quebec it probably will be — the benefit will accrue disproportionately to professional couples, who hardly need the help, while the policy will aggressively discourage for-profit supply by non-union labour, with all the attendant cost increases, work stoppages and waiting lists that implies.

Other things governments currently do individuals simply would not do on their own, though only because they are foolish and wasteful. For instance, in Ontario publicly-paid human rights commissioners will soon be deciding whether it is a denial of a woman’s human right to have to play an international soccer tournament on artificial turf rather than grass. Sadly, it is not clear what their answer will be.

]]>http://business.financialpost.com/2014/10/14/william-watson-should-we-spend-the-slurplus/feed/0stdCANADA_BUDGETWilliam Watson: The OECD has become a major world policy naghttp://business.financialpost.com/2014/10/08/william-watson-the-oecd-has-become-a-major-world-policy-nag/
http://business.financialpost.com/2014/10/08/william-watson-the-oecd-has-become-a-major-world-policy-nag/#commentsWed, 08 Oct 2014 20:10:50 +0000http://business.financialpost.com/?p=482731

The OECD is trying to influence everything — making it harder to influence anything

As part of this page’s continuing effort to bring you the most up-to-date coverage of breaking policy stories we subscribe to the e-mail services of most major international organizations. Usually the information they put out is interesting, sometimes even useful. But there are signs at least one of them, the OECD, is descending into dangerous hyper-activity.

Last Tuesday it released a couple of studies and policy recommendations telling its 34 member-countries — basically all the world’s rich countries — that they should stop subsidizing driving so much. They do this by giving overly generous allowances for the use of company cars, which comprise 12% of all cars driven in Europe, and by not taxing diesel as much as gas. Apparently, diesel produces more carbon when combusted. On average across the OECD the subsidy to company car use is 1600 Euros per year. Surprisingly, on this scale we’re the least guilty offender, providing a subsidy of only 57 Euros per year. The worst offender is Belgium, at 2763 Euros. The OECD doesn’t speculate on why Belgians are so car-crazy. Our ranking is surprising because in most of these studies we’re usually in the middle of the pack or toward what the OECD deems the offending end.

Two days later, the OECD issued a 274-page report called “How Was Life?” together with a fun interactive website showing how critical social and economic indicators have evolved in member countries over the last 200 years. (The average Canadian used to be about 170 centimetres tall (5 ft 7 inches) but now is almost 180 centimetres (5 ft 10 inches). Only the Dutch and Danes are taller. GDP per capita has gone from about $1,500 per capita in 1800 to about $25,000 per capita now, which as this space has stressed on many occasions is an improvement without historical precedent.

“How Was Life?” is a play on “How Is Life?” the OECD’s well-being initiative, which tries to get at more features of well-being than are contained in GDP. The ideological subtext of the well-being school is that if higher taxes discourage the kinds of traditionally economic activities that are covered by GDP, well, that doesn’t really matter since GDP itself isn’t all that important.

Related

After taking the weekend off — so as to improve its employees’ well-being, I guess — on Monday the OECD released a major report on regionalism showing that in many member countries the economic slowdown since 2009 has been more severe in some countries’ regions than in the countries themselves on average. It’s not really clear why that’s policy news: Different regions often have different industrial make-ups. But OECD Secretary-General Angel Gurria, a dynamo when it comes to scientific policy-making, argues it calls for “smarter public investment, especially in cities, and reforms of outdated local government structures.”

In Quebec at the turn of this century we went through an efficiency-motivated, top-down rationalization involving forced municipal mergers and it was hell. The OECD may not like “centuries-old structures that lead to fragmentation and inefficiencies” but if the people being governed prefer them to having far-off mega-mayors of mega-cities make important decisions for them, shouldn’t that count for something? In my town a big majority of us voted to get our (yes) century-old municipal government back after a new provincial government allowed a referendum on mergers its PQ predecessor had simply legislated. (Strangely, the PQ like mergers for municipalities, separation for provinces.)

The OECD regionalism exercise came with its own well-being initiative, a new report called “How’s Life in Your Region?” which allows readers to compare various indicators — not including height, alas — across 362 regions in the OECD countries. There’s also (of course) an interactive website that provides comparisons across regions. It seems that in terms of jobs, education, access to services and several other indicators Quebec is most like Wales (not the independent-minded Scots!), Idaho (not Texas), Saxony-Anhalt in Germany or Western Finland.

Also on Monday the OECD announced a new forum on African economic growth, which is actually forecast to outpace world growth for the next couple of years but needs to be better guided in order to make sure it’s “inclusive and sustainable.” The forum will host the launch of the OECD’s new “African Action Plan,” which I’m guessing will involve not subsidizing company cars, avoiding centuries-old municipal structures (possibly a problem in Egypt) and clicking through several additional interesting interactive data sites.

None of this is to disparage the data-gathering the OECD does. Comparing data across countries is notoriously difficult. It’s good that somebody does it carefully. The OECD StatsExtract statistical site is extremely user-friendly, much more so than our own StatCanada’s. And its economic analysis is invariably state-of-the-art, even if that gives it too much of an east-coast U.S. instrumentalist bias (though when you get down to it we really shouldn’t be subsidizing company cars or preferring diesel to gas.)

But a foundational principle of economics is that there can be too much of a good thing. The OECD costs two-thirds of a billion Euros a year. Canada’s contribution to the base budget is almost 4%. The OECD has become a major world policy nag. It is now a big enough shadow-government to be suffering from what has become the standard big-government syndrome: trying to influence everything makes it harder to influence anything.

Some people say the world needs more Canada (except, many of the same people say, in Iraq). While we’re doling out portions this way the world could probably do with a little less OECD.

ISDS may be left out of the final CETA agreement. If so, too bad for Canadians and Europeans who might have been employed by investors who instead decide to stay at home

When the prime minister and trade minister refer to the Comprehensive Economic and Trade Agreement with Europe as a “big deal,” they don’t mainly have in mind the 1,600 pages of its now almost final text. But they could. And it’s still subject to a legal review, which might add even more pages.

The NDP’s reaction to the release of the provisional text last Thursday was that they wanted to take the weekend to read it. They must be fast readers. War and Peace is only 1,200-1,400 pages, depending on the edition, and Tolstoy moves things along pretty briskly compared to the porridgy legalese of CETA.

The Canada-U.S. Free Trade Deal was a little over 200 pages, which was still too many for then Trade Minister John Crosbie, who candidly told Parliament he had not read the whole thing. (Was Crosbie our last candid politician?) He was right not to have done. Long lists of exactly which product transformations were enough to have a good categorized as Canadian or American for the purpose of crossing the border free of duty meant nothing to all but the couple of dozen people in the country who had negotiated them.

The text of NAFTA ran about 750 pages. Stepping that up to 1,600 pages is not necessarily progress. The text of the colony of Canada’s Reciprocity Treaty with the United States in 1854 ran to just a couple of pages: “It is agreed that the articles enumerated in the schedule hereunto annexed, being the growth and produce of the aforesaid British Colonies or of the United States, shall be admitted into each country respectively free of duty.” There followed a list of 28 products, culminating with “rags.”

Corporate investors get roughed up from time to time

Despite not having read the text, the NDP knew it didn’t like ISDS — “investor state dispute settlement” — which in some circles is regarded as being basically as barbarous as the beheaders at ISIS.

ISDS, you see, gives corporations “rights.” If a Canadian company investing in Europe has been discriminated against because it’s Canadian, or has had its property expropriated, whether de jure or de facto, it can appeal this mistreatment to an independent tribunal — though made up of panelists chosen by the Canadian and European governments. From the company’s point of view, this is better than an appeal to Europe’s courts, which if they’re anything like ours will move painfully slowly and may be prone to sympathize with the home team.

There aren’t actually any page numbers in the current internet version of the legal text, which you can find on the website of the Department of Foreign Affairs, Trade and Development, but if you export the investment chapter to a pdf file, it comes to 24 pages. Most of it consists of either limits on corporate investment rights or exemptions for various sectors. For instance, we exempt “cultural industries” while the Europeans exempt “Audiovisual services.” (Their producers of projectors and power-point packages fear competing with us?)

The respective governments agree not to limit market access to each other’s investors when they’re establishing businesses (except for certain exceptions). They agree not to impose performance requirements for gaining market access (except for exceptions). They agree not to discriminate against firms on grounds of nationality (except for… you’ve got it). They agree not to engage in: fundamental breaches of due process, manifest arbitrariness, targeted discrimination on manifestly wrongful grounds, and so on and so on.

Related

They also agree not to expropriate each other’s investors, except “for a public purpose, under due process of law, in a non-discriminatory manner, and against payment of prompt, adequate and effective compensation.” Note that this means the governments do remain perfectly free to engage in expropriation, so long as they do it subject to those conditions. Moreover, the chapter stipulates “for greater certainty” that “non-discriminatory measures of a Party that are designed and applied to protect legitimate public welfare objectives, such as health, safety and the environment, do not constitute indirect expropriations.”

Does anyone in the Liberal Party or the NDP think Europe’s governments should be able to expropriate Canadian investors without due process, without fair and prompt compensation, and not for a public purpose but say for a Putin purpose, i.e., capriciously? And should they be able to do so in a discriminatory manner, i.e., expropriating the Canadian investors in an industry but not the European investors in that same industry?

Yes, giving corporations the option of appealing their treatment to an impartial tribunal does in a sense give them rights. But are such rights unreasonable? Aren’t investors much more likely to invest if they know that any government that decides to push them around can, in effect, be taken to court?

It’s true that investors get this privilege under CETA but other economic actors don’t. But which other actors face the same risks? Immigrants, whether temporary or permanent, are subject to the immigration laws of Canada and Europe. People living in Canada, wherever they’re from, enjoy the protection of our Charter of Rights and Freedoms. Canadians living in Europe are seldom if ever exposed to the personal equivalent of expropriation. Corporate investors, by contrast, do get roughed up from time to time.

It seems some German politicians are with the NDP in their opposition to impartial arbitration of investment disputes. According to some reports, ISDS may be left out of the final agreement as a result. If so, too bad for Canadians and Europeans who might have been employed by investors who instead decide to stay at home.

Small business is responsible for 50 or 60 or, I don’t know, 120% of the new jobs created

There’s a construction site near where I work. We didn’t have them in Montreal for a long time. But our last referendum was almost 20 years ago now so, after a long hiatus, we Montrealers have been able to re-acquaint ourselves with the daily rhythms of the construction industry. Toward mid-morning a canteen truck shows up and the hardhats come over in small groups to buy their — I don’t know — carrot sticks and tofu?

This little daily tableau took on extra meaning for me last week after federal Finance Minister Joe Oliver announced his government was introducing a Small Business Job Credit that would have the effect of reducing the Employment Insurance tax for small business from $1.88 per $100 of insurable payroll to $1.60. For big businesses, however, the rate remains at $1.88 until 2017, when it seems all businesses will pay the same rate again.

I suppose this means the canteen operator serving the construction site gets the tax break — assuming he’s a small operator, which he appears to be though I haven’t made a close study of it — while the apparently pretty big company that employs all the construction workers doesn’t get the tax break, at least not yet.

Why does the government favour small business in this way? We’ve all heard the mantra that small business is responsible for 50 or 60 or, I don’t know, 120% of the new jobs created every year, so I suppose we give them special favours because they employ so many people. But does that make sense? If they already employ lots of people, maybe they’re such good job creators they don’t really need a stronger incentive to employ people. Maybe it’s big firms that need the help. Apparently, they’re not great job creators.

Does the fact that small businesses employ lots of people really mean they’re the engine of employment in the economy? In the little construction montage I see every day it seems pretty clear that the small business guy (the canteen operator) has his job because the big construction company is employing lots of people putting up the building. And, so far as I understand (though these real estate deals can be notoriously complex) the construction company is building the building for another big company whose name will be emblazoned on the side of it. This would seem to be a case — a rare exception, if you believe the small-business lobby — where one big company has contracted another big company whose employees are giving work to a small company.

How many small businesses do you suppose make their living supplying services to big businesses and their employees? I bet lots. There are dozens of big, well-known businesses in downtown Montreal (still, in spite of our referendum-riddled history) and you see their employees making use of all sorts of small businesses: coffee shops, restaurants, dry cleaners, print shops, bicycle delivery guys and girls, taxis, boutiques of all kinds, mid-morning snack canteens. I wonder how many of those small businesses that are creating all that employment do it by hiring people both to provide services to large businesses directly and to meet the consumption needs of the employees of large businesses, who are often well-compensated because labour productivity is typically so much higher in big businesses.

If big businesses are demanding lots of services from small businesses, which in turn enables small businesses to do all that hiring, is it really a good policy to give tax favours to small businesses but not big businesses? Might that not create more small businesses in the economy and fewer big businesses? And because small businesses do tend not to have very high labour productivity, might our fiscal encouragement of them be contributing to our productivity problem?

What’s the real reason small business gets special help? Because, as Lincoln said of poor people, God must love them, he created so many of them — and, Lincoln might have added, endowed them with a strong propensity to be active in local politics and vote. Also because, as we all are aware (from movies, Greenpeace, and investigative TV journalism) big businesses mainly exist to: pollute the environment, harass and exploit workers, and endanger everyone’s health by forcing us to eat, work with or live beside dangerous products. Small business good, big business bad, as George Orwell would have put it.

But it’s not 1984. It’s 2014. More and more of us are university graduates, supposedly with well-developed critical faculties, supposedly able to think for ourselves. Economists have been pushing the virtues of neutral taxes, ones that don’t discriminate between different corporate forms or sizes, almost since there first were economists. It would help if a nominally market-oriented government would push the de-stigmatization of big business. It would have helped had they done so for their eight years in office. Maybe they’ll do it in their next term in office — though if pandering to small business helps get them that next term, maybe not.

The strange thing about modern separatist movements is that the one thing they really need — control over their own money supply — is the one thing they can’t ask for

In the suddenly serious saga of Scottish separation, which has so many parallels to our own five-decade historical drama, is Scotland playing the role of Quebec or Canada?

Most Canadians would say Quebec. Scotland’s separatists are the ones who, like Quebec’s, want to break up a demonstrably successful country to try something more risky, romantic and ethnically-based — if it’s still possible these days to speak of ethnic differences among the polyglot populations of most rich economies.

True, there are important differences between Scotland-as-Quebec and the real-life Quebec-as-Quebec narrative we’ve been living through these last 50 years: One, partly because London and Edinburgh agreed on how the wording of the referendum question would be decided, the Scots are asking themselves the plain and simple six-worder, “Should Scotland be an independent country?” not a 43-word interrogatory in the style of a mortgage sub-clause such as the PQ asked in 1995. And, two, London has more or less pledged to abide by the result, though it’s always possible that the day after, to coin a phrase, it may try to exploit evident wiggle room in the two governments’ 2012 agreement to “continue to work together constructively in the light of the outcome, whatever it is, in the best interests of the people of Scotland and of the rest of the U.K.” In any case: Scotland as Quebec.

On the other hand, Paul Krugman suggested in the New York Times Monday that Scotland’s ultimate intention is to be a kind of Canada, that is, a smaller, more left-wing country dependent economically on its much larger and more market-oriented southern neighbour — Scots are just a tenth of the UK’s population — but one which has survived as a distinct, independent and, in the rest of the world’s opinion, if not always that of its own elites, highly successful political entity.

To think of the Scottish separatists as the Canadians in the analogy is jarring to real-life Canadians. Most of us want no truck nor trade with separatists or separatism. It’s therefore comforting that Krugman doesn’t think the Scottish separatists can actually do it. They may win the referendum — though the prediction stock markets still say they won’t — but they can’t in the long run end up like us. The problem, which Scots should certainly appreciate, is money, both who controls it and how it flows.

Krugman argues independent countries need their own currency. If your economy suffers a macroeconomic shock that your big trading partner doesn’t, one way to absorb it is to let your currency depreciate. But you can only do that if you do have your own currency. If you’re still using the old country’s currency, you’ve got to either lump it or let your real wages fall — which is never fun — until increased competitiveness offsets whatever downturn you’ve experienced.

Another possibility is that someone gives you fiscal assistance to tide you over. Florida and Spain are symmetrically located in their respective continents and both suffered housing collapses and sharp economic slowdowns after 2007. But Florida got massive fiscal assistance from the union it belongs to (the same United States it tried to separate from in 1861), both government-to-government and via federal programs that continued to deliver services and payments to individual Floridians. Apart from bank bailouts, Spain got much less from the EU. While Florida is coming back Spain is still suffering.

Related

The strange thing about modern separatist movements is that the one thing they really need — control over their own money supply — is the one thing they can’t ask for. With good reason, people don’t trust new, untried monetary authorities to provide currency that will maintain its value, especially given all the economic difficulties that can reasonably be expected to attend a constitutional rupture, even a peaceful one — and the English and Scots have a long and bloody history of not always being calm and rational about their differences.

So far the English have been very civilized about the prospect of Scottish separation, though most likely because they thought it a fantasy that would never happen. But they surely won’t be so civilized as to share control of the pound sterling. And if they did, what influence would the Scots have? Even adjusting for their possibly superior political and financial acumen, they are, as mentioned, only a tenth of the U.K.’s population. What do they get, maybe one seat on the Bank of England’s governing council? The possibility of England’s agreeing to risk-sharing social policies such as shared unemployment insurance is even more remote. And what’s the point of separating if you turn around and immediately try to recreate the fiscal arrangements you presumably found so distasteful to begin with?

With just a week to go now, last weekend’s poll showing the Yes side with a slim lead has created the same combination of panic, desperation and despond on the No side that Canadian federalists experienced in the final week of the 1995 referendum. In the end, you’ve got to think Scots are as sensible as Quebecers. If not, we find ourselves in the unaccustomed position of hoping Krugman is right and the first years of Scottish independence prove a cautionary tale to our own separatists.

Some among the levellers will want to deprive rich children of any advantage

Where do you suppose the equality crusade will land next? I’m thinking tutoring. CBC News ran a report the other night about tutoring. Though the data aren’t good — which surely means Statistics Canada will start conducting surveys about this emerging social issue — it seems tutoring is on the rise. But not, as you will have guessed, equally among all income groups.

The report featured a poor lad of nine years, from Westmount (of Anglo enclave fame), wearing — at home in summer — a jacket and tie and being tutored by an attractive, articulate young woman. (Perhaps 30 years from now he will write a successful novel about the experience.)

A mainly unspoken theme of the report was that maybe this was not the best use of a boy’s time in his final precious days of summer freedom before the annual round of classes, homework, after-school programs and evenings at hockey rinks begins. But another theme, this one spoken, is that tutoring is different now. It used to be for laggard children. But now ambitious parents — tiger moms and dads — are using it to make sure their tiger kids don’t fall behind in the first place or, better yet, keep their lead over all the other little carnivores.

As mentioned, it’s not all kids who have this advantage. Families making more than $100,000 a year are something like two and a half times more likely to employ a tutor than families making less than $40,000.

If you do the arithmetic (for which no tutoring should be required), that’s hardly shocking. Families making more than $100,000 a year are roughly two and a half times more likely to engage in every form of economic activity than families making just $40,000: They have two and a half times more income.

True, higher income families may save more than lower-income families. But that just means they’ll accumulate more wealth and have more spending than everyone else in retirement — or, if they’re self-deniers, will have more to pass along to their tutored kids, who maybe deserve an eventual reward for having had to dress up and do schoolwork in summer.

But you can hear not-so-distant rumblings among the egalitarians. By receiving tutoring, rich kids get an unfair advantage that will pay off later in life in better jobs and higher income. Of course, if Nobelist economist Edmund Phelps is correct (in his recent book Mass Flourishing: How Grassroots Innovation Created Jobs, Challenge and Change) and “rich kids tend to be short on the focus and hustle necessary for big success,” maybe a little tutoring now is needed to offset the shortcomings of character that will hobble them later on in their struggles with not so privileged young strivers. In this view, tutoring is anticipatory remediation for second-rate scions.

Related

In a common-sense world, public opinion would accept that rich people will always have advantages poorer people don’t. In the current anti-inequality climate, however, that view seems bound to be swamped by the presumption that tutoring is simply one more advantage piled onto an already insurmountable stack of advantages. Society surely can’t stand idly by.

What’s to be done?

Some among the levellers will want to deprive rich children of any advantage. Watch for attempts to restrain the demand for tutoring or its supply or maybe both. In Europe there’s a movement to (somehow) outlaw business e-mail at home — though of course without reducing pay. Perfectly parallel logic would lead to outlawing any form of schoolwork at home, whether tutoring or homework. Will we have a tutoring police?

Others will prefer to level upward: All children should have the same access to tutoring as rich children. Legal aid started small and exploded, on the grounds that the non-rich shouldn’t be deprived of access to lawyers. But if they do now have guaranteed access to lawyers, how can they be denied such an important tool for furthering their education as tutoring?

Is it so hard to imagine federal grants to help equalize access to “non-traditional providers” of education across provinces — if not with this government, then with the next? Would an eventual Tutoring Canada be out of the question? Or even universal Tutor-Care?

If that seems paranoid, consider that the best predictor of social policy in the last half century has been to think up something completely far-fetched and then wait 20 years.